Ice cream helps to understand

The days before the Easter holiday saw a downturn in commodity prices. This consolidation did not just effect nickel, which fell by around 5% on the London Metal Exchange (LME) from USD 10,200.00/mt to 9,700.00/mt, but also others of the set of industrial metals. Aluminium and copper eased off by about 5%. Copper fell from just below USD 6,000.00/mt to USD 5,700.00/mt, and the 3 months aluminium contract sank to USD 1,895.00/mt from just under USD 2,000.00/mt. The market is between neutral to slightly oversold, and on the 13th April 2017, nickel LME warehouse stocks were reported at 369,354 tons. This corresponds to a deficit of 57,828 tons or 13.5% less than the stocks of 427,182 tons a year ago, and is a decrease of 21.5% from the high of 470,376 tons on 3rd June 2015.

A change in trend is difficult to derive from both this and the price correction. It is more likely that investors took the opportunity to either close positions or take profits from positions just before the holidays in Europe, in the USA and in other places in the world, thus putting some pressure on prices. This phenomenon can be observed with unfailing regularity. Nevertheless, analysts of course always find some fundamental aspects or certain facts, which could explain such price movements.

With that in mind, the news agency Bloomberg confirmed that the state-owned Indonesian mining company, PT Aneka Tambang, had received an irrevocable export licence for 2.7 million tons nickel ore (and 850 thousand tons Bauxite), which had already been indicated by the company itself. The amount is, however, considerably less than the generally expected 5 million tons. Some market observers saw this as a reason for nickel’s price fall on the LME. But, since this had already been announced by the mining company, it was actually not a new piece of news any more. And it can be generally accepted that a confirmation of facts is not enough to cause prices to move strongly. If at all, a more crucial influence would have been more likely when the information first became known.

Statistics can tell us that causality is not always derived from correlations. In other words: If two measured values develop along seemingly dependent lines, then it still does not mean that one is the reason for the other. There is a well-known example that more children drown when a lot of ice cream is sold. The cause of this – quite obviously – is not the consumption of ice cream, but because it is summer and more children go swimming. Whether the comments made here are ultimately proven true will be seen after the Easter holidays when economies pick up again. Of course, it cannot be excluded that this editor finishes up with his ice cream melting in his hand.

Of course, it must be appreciated that it would probably be boring if analysts always came up with the same explanations over and over again. But the fundamental climate for nickel, while not euphoric, can still be assessed as well supported. There are several factors in support of this. Globally, industrial production continues to recover and this is good for demand in metal. In addition, the automotive industry still remains strong.

It had been generally expected that growth in China and the USA would weaken a little, so this has already been reflected in prices. In point of fact, latest trade figures from China even indicate that exports in 2017 are developing better than had been previously anticipated. This could mean that the Chinese growth outlook (and with it the related metal demand) could improve. Just at this present time the Chinese economic figures for the 1st quarter of 2017, in the form of its GDP growth, have been released. With a growth of 6.9%, it is much higher than expectations and the goal of 6.5% set by the government. On top of all this, Donald Trump seems to be slowly adjusting to his role of American President. His tone has become much more moderate in many areas. In an interview with the Wall Street Journal he said that he does not see China now as a currency manipulator, an opinion he had even expressed on his first day in office. Also, with reference to NATO, Trump has changed his opinion to one with more reality. In a meeting with the NATO General Secretary, Stoltenberg, he said that the Transatlantic Defence Alliance is “a bulwark of international peace”. Upon taking up office he had described NATO as being “obsolete”.

But this appearance of the American President developing more positively must not hide the fact that nearly everywhere in the world at the moment, we are confronted by increasing political uncertainties, with, at times, a possibility of escalating even more. Instabilities in South America also belong to this problem, as well as the hardening of the conflict between North Korea and nearly all the rest of the world. The new American President is not exactly acting very diplomatically here.

Even on the European continent, all is not well. Brexit is now sufficiently well known and well discussed, even if the full consequences are still very much in the open. But now there are added issues and challenges. Tensions between Hungary and the rest of Europe are not exactly easing. Relations are actually coming under more pressure by recent nationalistic developments. In addition, the relationship to Turkey and the state of affairs in that country will probably not improve for quite a time after the result of the referendum. Finally the Presidential elections in France seem now to be even a little more uncertain, despite the somewhat more positive results in the Dutch elections. In the last few weeks, the politician Jean-Luc Mélenchon, who can only be described as tending towards the extreme left, has overtaken the conservative candidate, François Fillon, in the polls and he even seems to be gaining ground on the liberal centre candidate, Emmanuel Macron.

In a bad scenario, there could be the constellation of the extreme right populist Marine Le Pen going against the far left candidate Mélenchon in the second round vote. How the supporters of French rights and liberties would then decide can only be read in the stars, along with the unforeseeable consequences for the European idea, as both Le Pen and Mélenchon are against the European Union.

So it is all the more surprising that the global economy and the stock markets seem to be unimpressed by political developments, even though a few situations could have given rise to a moderately severe crisis. The risk analysts of BMI Research have also come to this conclusion. On behalf of the international insurance broker, Marsh, they have put the global risk of countries under the microscope and have made a risk map. Similarly the French insurance company, Coface, has also made a research of risk valuations. All the analysts confirm that the nationalistic and protectionist tendencies in many countries have increased. Moreover, conflicts, civil wars and socioeconomic instabilities have characterised the year 2017. Furthermore, it can be expected that these risks will only increase. It is, therefore, of no surprise that it is not just internationally involved companies which, looking ahead, are trying to come to terms with these political uncertainties, which are the cause of economic uncertainties too, and are trying to take precautionary measures in the industrial and emerging market countries. The run-of-the-mill professional investor seems to have life much easier. As long as central banks pump cheap money into the market, then everything is alright, and the party on certain types of asset markets, such as the stock markets, can carry on.

The guiding principle seems to be that whatever helped in the financial crisis can also help in any new crisis. But it is not as simple as that. Even though monetary policy measures certainly seemed to be effective in the short term, it is really amazing to hear that after over 7 years of loose monetary policy, with billions being pumped into the financial sector, it is in actual fact only now that the first amounts are coming into the real economy. It can only be recommended that one should be aware of black swans appearing on the horizon. Unfortunately they do appear very quickly and with no big announcement. But, until then, the situation will, first and foremost, continue as before.

It can often be observed that quite a few practices and procedures are, after a time, accepted and even taken as (god) given, so that hardly any more thoughts are made on how they happened in the first place and why. Perhaps at the beginning some people had even shouted their objections or, less successfully, hit their heads against the brick walls which the influential lobbies had built to protect their own interests. Right now, this seems to the probable situation on the London Metal Exchange (LME). We are talking here about trading in the ring, where traders, representing the ring dealing members of the exchange, sit opposite one another on circular padded seats, almost like sofas, and, at certain defined times, shout out their trading orders in open outcry. The second ring session has a special significance, as here the last offer price quotation of this round is published by the LME as the official price settlement, or fixing price, for the individual metal just dealt, and is recognised as the reference price world-wide. For probably good reason, two changes on how trading in the rings will be handled in the future have now been put forward for adoption.

One of the changes is to improve settlements when one of the parties in the transaction has more amounts to buy or sell than the other party has to sell or buy at the bid price. Furthermore, the minimum tonnage for a transaction in the second ring should be doubled from 10 to 20 lots per metal. This would mean that for nickel, should this proposal be accepted, traders in the ring would have to make offers for a minimum nickel tonnage of 120 tons which is the equivalent of 20 lots.

The goal of the LME can only be that of increasing transparency and, above all, improving the representativeness of such an important price, which is the official settlement price. And really now, it has to be asked just how this settlement price, so significant for millions of business transactions, had been determined throughout all the decades in the past. It is not the pollen of Spring which causes one to rub one’s eyes.